Rules for Private Loans Proposed

Proposed regulations governing disclosures, certifications, and practices relating to private education loans under the Truth-in-Lending Act (TILA) were published by the Federal Reserve Board on March 24. These changes to Regulation Z, as the rule implementing TILA is known, were mandated by Title X of the Higher Education Opportunity Act. Although not addressed specifically, student loans offered by institutions may fall into the definition of private education loan.

The proposed rules primarily address required disclosures to consumers and provide drafts of model forms. Lenders will be required to disclose certain information about their loans, and federal loans that may be available, at three junctures:

With application or solicitation

At the time of loan approval

At consummation

The statute provides detailed lists of the information that must be disclosed, which the board has incorporated into its proposed rules and model documents with a few exceptions. In a few instances, the board proposes to deviate from the statutory requirements where it feels that the information would be repetitive or confusing to consumers if disclosed. For instance, the board balked at requiring a statement that federal education loans may be obtained in lieu of or in addition to private loans, opting instead to provide information on federal loans in a box labeled "Federal Loan Alternatives" on its model forms. Nor would information about the availability of federal loans be required in disclosures provided at consummation or acceptance of a loan, because the board did not feel that such information was useful to consumers at that time.

The rules would also implement prohibitions on certain practices including co-branding a loan product with a name, logo, or other identifier of an educational institution to imply endorsement of the loan by the institution. The board proposes safe harbor language that creditors could use explicitly stating that the institution does not endorse the creditor’s loans and that the creditor is not affiliated with the educational institution, but would allow the creditor to refer to a specific institution if necessary to explain or promote its products.

The HEOA changes to TILA also require the student borrower to obtain a self-certification form from the educational institution, along with certain information about their costs of attendance and financial aid, and submit a signed copy to the lender. The proposed rules allow this form to be paper or electronic, including signatures, and would further allow the institution to transmit the form to the lender (rather than the student).

The rules also cover certain consumer protections and time frames mandated in the law. For instance, a creditor is required to give the potential borrower at least 30 days to accept an offered loan, during which time the terms must remain constant (except for changes in interest rate tied to an index). A borrower must also be given three days after accepting a loan to reconsider, and no disbursement of proceeds may be made during that period.

Comments on the proposed rules will be accepted until May 26. Members are urged to review these regulations and share questions or concerns with Anne Gross.